Vamvoukakis and ANOR v Troulis and ANOR S65/1998 [1999] HCATrans 107 (16 April 1999)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S65 of 1998

B e t w e e n -

GEORGE VAMVOUKAKIS and EFFIE VAMVOUKAKIS

Applicants

and

KONSTANTINOS TROULIS and TASSOULA TROULIS

Respondents

Application for special leave to appeal

McHUGH J

CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 16 APRIL 1999, AT 12.38 PM

Copyright in the High Court of Australia

MR P. KINTOMINAS: May it please the Court, I appear for the applicants with my learned friend, MR H.S. PACKER. (instructed by Nicholas G. Pappas & Company)

MR B.A.J. GUEST: I appear for the respondent, if the Court pleases. (instructed by McDonell Vertzayias)

McHUGH J: Yes, Mr Kintominas.

MR KINTOMINAS: May it please the Court, in this matter the applicants complain that the Court of Appeal misunderstood and/or misapplied the principles relating to the court having to do the best it can to ascertain the measure of damages.

McHUGH J: But what was there upon which the court could do the best it could, in this particular case?

MR KINTOMINAS: We say what the Court of Appeal should have done is as follows: it first of all should have asked the question, is there evidence that the plaintiffs sustained real, as opposed to nominal damage, and that question would have been answered, "Yes".

McHUGH J: Why? Why is that?

MR KINTOMINAS: It would have been answered "Yes" for the following reasons: one - perhaps before I get on to that, there is a fundamental matter of fact that has to be kept in mind and which I think therefore my submissions could be better understood if that factor is kept in mind. This was a case primarily fought before the trial judge on the issue as to whether or not there had been a representation made that the business took $5,500 a week in takings. That was strenuously denied but it was found - - -

McHUGH J: Yes, and found in your favour.

MR KINTOMINAS: Found in our favour.

McHUGH J: Yes.

MR KINTOMINAS: What the parties said about what the business did take was this: the male applicant said it took about $3,000 a week; the female applicant said it took less than $2,500. I am sorry, I withdraw that.

McHUGH J: Yes, I appreciate that they said that but that does not help you. Can I put to you what it seemed to me are the fundamental problems in your case? First of all, you have a purchase price of $80,000, is that right?

MR KINTOMINAS: Yes, your Honour.

McHUGH J: And there were $24,600-odd for plant and equipment?

MR KINTOMINAS: Yes, your Honour.

McHUGH J: Which would seem to indicate that you paid $55,333-odd for goodwill?

MR KINTOMINAS: Yes, your Honour.

McHUGH J: Now, your damages was the difference between the price you paid and the real value of the business?

MR KINTOMINAS: That is correct, your Honour.

McHUGH J: The lower the takings the greater your damages?

MR KINTOMINAS: That is correct, your Honour.

McHUGH J: Yes. Now, as far as I can see, the only relevant evidence about takings that you could rely on is the admission in the defendants' income tax returns that there was takings of $2,269 a week. There was evidence, was there not, from your accountant that you would expect a business of this nature to earn about 50 per cent of the gross takings?

MR KINTOMINAS: Yes.

McHUGH J: So, that would mean that the net earnings were a little over $1,100 a week which runs out to something like about $58,000 net, but you had to pay rent when you went into the business and that was $300 a week.

MR KINTOMINAS: That is right, yes, your Honour.

McHUGH J: So, that is $15,000 that has got to be charged against the profits. That would seem to indicate that the takings of the business or the earnings of the business a year was $43,000. Now, you have paid $55,000 for this goodwill which seems to indicate you have paid about one and a quarter times earnings. That seems a very cheap business, a very cheap price to pay, and you are a very experienced counsel and my suspicion is, Mr Kintominas, that the reason evidence was not called from valuers is that on the figures the valuers would have said that you suffered no loss because you got a bargain, even on the defendants' figures. Now, what do you say about that?

MR KINTOMINAS: Well, first of all, your Honour, I would categorically state that there was no - - -

McHUGH J: There was nothing improper in it, Mr Kintominas.

MR KINTOMINAS: No, there was not. There was no evidence from a valuer up in my pocket or my sleeve. Indeed, I am grateful for your Honour to say that I am a very experienced counsel, but I would say this, your Honour, and - - -

CALLINAN J: But you might deliberately have not got a valuer up your sleeve or in your pocket because of what has been put to you.

MR KINTOMINAS: No, your Honour. Indeed - - -

McHUGH J: But it does seem cheap. Ordinarily - - -

MR KINTOMINAS: Can I say this, your Honour, because I feel your Honour has possibly jumped to the wrong conclusion, and that is this, that does not take into account wages.

McHUGH J: Well, you have to charge wages against the business.

MR KINTOMINAS: Then the profit is zero.

McHUGH J: Well, it may or may not be, depending upon what you take but there is other evidence about living off the shop and we just do not know what the baseline is in this particular case.

MR KINTOMINAS: Well, your Honour, what I submit would be the proper way to approach this, if one was to do the exercise - - -

McHUGH J: Yes, but could I just add these other problems that seem to me?

MR KINTOMINAS: Yes.

McHUGH J: What do we know? I mean, when you are valuing goodwill, one is looking at the prospects of the continuity of the business. So, you look at things like what is the general reputation of the business; what is its general trading conditions; what is the ability of the people who are going to run the business; is there any personal characteristics in the goodwill of the business; is there any competition; do you have security of tenure; how long was this lease for, matters of that nature: has there been any movement of population? All of this material is just absent from the case. I mean, one would expect in a properly run case that that would be the case but you make a valid point about the necessity to charge wages against the gross earnings but then it is a question of what is a proper payment for wages. But, let it be assumed, for example, that somebody took the view the wages were $25,000 - you were talking about $18,000, so you paid three times earnings. That does not strike me as paying too much for a business, a mixed business.

MR KINTOMINAS: Well, if I could put it to you this way, your Honour: the evidence was that when the shop was sold the male vendor was in the shop five days a week, basically from dawn to dusk, and the female vendor worked part-time in the shop helping out in the busy periods. I think, your Honour, it was not $58,000 but $53,000 but without quibbling about a few thousand dollars - - -

CALLINAN J: $55,300.

MR KINTOMINAS: Once one takes off the $16,000, whatever it is for rent, there is something less than $40,000. Now, if one then takes off the wages of two people, one part-time, one more than full-time - - -

CALLINAN J: But it depends what the view is about the crediting of wages to proprietors. Now, views about this may differ but whether you have to deduct proprietors' notional wages in order to get a notional return in respect of which you then calculate the value of the business, would be very much, I would have thought, a matter of contention. There would be no unanimous view about that at all, I would not have thought.

McHUGH J: And, you see, the respondent in this appeal is a person who is found to have been fraudulent, in effect - misrepresented the takings of the business - and the best evidence from your point of view that you can put in is an income tax return which shows $2,269 a week. Well, one is entitled to be sceptical about that, having regard to the credibility of this particular respondent, as found by the learned trial judge.

MR KINTOMINAS: It has the rather ironic effect, then, that if there had been no second set of figures drafted by the accountant and if I had conducted no attack at all upon the tax return, or the figures conducted, but the trial judge had come to the view that the misrepresentation had been made, that is, that the figures were really $5,500 a week and the suggestion that they had been supplemented by putting $2,000 a week into his pocket or $2,500 a week into his pocket was made, but it was untrue, then I would have been able to rely on those figures in the tax return or I would have been able - - -

McHUGH J: Take your own client's evidence. He said it was not more than $3,000 a week but if you bump it up another $600 a week over the defendants' or respondents' income take returns, it becomes extremely difficult to have the faintest idea of whether or not you paid too much for this business. I mean, having regard to the misrepresentation, one would suspect that you probably did but the point is that there is just no information there.

MR KINTOMINAS: But, your Honour, that is my point, that having regard to the misrepresentation, one would be safe in concluding that we probably did and that is all, in my submission, that we need to do at that stage. I mean, we need to do a bit more but the first step of the argument is to show, on the balance of probabilities, that we have paid too much.

McHUGH J: Yes, but that is not a special leave point. It is a tragedy that this case which, on any view - it seems to me, that any damages over and above what you have got, at best, could be no more than a few thousand has been swamped by the legal costs of this appeal

MR KINTOMINAS: Certainly, your Honour, and indeed, as your Honours can understand, that is one of the principal motivations in bringing this action.

McHUGH J: Yes.

MR KINTOMINAS: It is not the $20,000 or $30,000 extra that we ought to get if we are right, it is the only ways that we can recover six days of arbitration, 10 days before a District Court judge and two days before the Court of Appeal. It is the only way. The point that learned senior - - -

CALLINAN J: But having had the advantage, I think as Chief Justice Gleeson described it, as a "warm-up" of, what, six days before the arbitrator, I would have thought that you would have had abundant opportunity and a very clear indication that in order to succeed you would need to put on some proper valuation evidence. How that would not have become apparent after the failed arbitration I find very difficult to understand.

MR KINTOMINAS: Well, what happened at the arbitration, your Honour, was this, that - and, again, despite what his Honour Justice McHugh says about my experience - unfortunately, when the matter was run at arbitration it was run on the basis that if we won we were entitled to get our money back and no one on either side really questioned that. Once the principles in Gates were understood that it was necessary to make an assessment of what the real value of the business was, was something that tactically I woke up too late. I just want to assure the Court there was neither a valuation in my pocket nor was there a conscious decision not to obtain - - -

McHUGH J: We certainly accept that but might I emphasise that, even if you had, there is nothing improper about it.

MR KINTOMINAS: And, then, your Honours, if this had been made a ground of appeal before the Court of Appeal then one of things we could have done would possibly to have gone out and had a valuation and at least persuaded the Court of Appeal that what they ought to do is just give us a limited retrial on the damages issue only, only on the question of if we can get an expert's report which would justify the value of the business on one of those sets of figures. What the Court of Appeal said, in effect, was that even if we had an expert's valuation, based on one of those sets of figures, it would not do us any good. That is the point we would take the greatest cavil with.

McHUGH J: Well, that was a conclusion the court drew from the entirety of the evidence but that really only means there was a question of fact involved. The Court of Appeal thought that the evidence about what were the takings of this business was too unreliable to be the subject of any expert opinion.

MR KINTOMINAS: What the Court of Appeal, in our submission, failed to address was this, that there was a unanimity between the parties. The parties were ad idem on way, constructively, that the takings, whatever they were of this business, were no more than $3,000, and that is the best that one can put it from the point of view of the other side. On the evidence, it was no more than $3,000. It could well have been $2,500, and as your Honour pointed out earlier, the smaller the takings the less the value of the business. Now, if one takes the view, "Well, why did they represent the business to earn $5,500 a week when it was earning no more than $3000?"

McHUGH J: Well, they might have been puffing, who knows, but the fact is, it does not really get you anywhere. Let it be assumed - what if the figure was $3,000 per week? We are talking about a net profit of something like, what, close enough to $90,000 from which would be deducted a charge for rent and there is a charge for wages and, once again, we are getting to this real problem as to whether or not you are paying much more than one or one-and-a-half times earnings, maybe not even one-times earnings.

MR KINTOMINAS: If one draws the assumption or the conclusion that the reason why the representation is made, which has to be knowingly false, is to otherwise justify a price which would be unjustifiable.

CALLINAN J: Well, say the vendor was very naïve, that he did not understand that the price depended upon multiples, he just wanted to find a buyer, and in fact he undercharged for the business, that might have been the valuation, for instance, that the business was sold far too cheaply.

MR KINTOMINAS: Well, your Honour, I would always concede something as a possibility but it must be a fairly far-fetched scenario that what happens is the business earns $3,000 a week, it is really worth what my client paid for it, and the $5,500 representation - - -

McHUGH J: People have very strange views about what values are. In this very week in the United States people are paying 91 times earnings for Microsoft. Now, it might be a hard multiple to maintain. People pay fortunes for property which were overvalued, in recent years. There is nothing unusual about it. I mean, this man, this respondent, may have put a figure on the business and then he misrepresents what it is and maybe his business was worth more than the figure he was asking. That is the problem, we just do not know. There is no reliable evidence of takings and there is no valuation evidence and, as far as I can see from our book, there is practically nothing that throws any light on the factors which are usually so relevant in determining whether whatever goodwill a business has got is likely to persist in the future, or increase.

CALLINAN J: Say that there was a major project which would have put competing shops around the corner, we do not know whether that may or may not have been about to materialise, for example, or had materialised. There are all sorts of possibilities that could influence it.

MR KINTOMINAS: Well, your Honour, certainly there was evidence about other shops and this sort of thing, which has not been reproduced in the application book, and I do not know that I can sensibly argue it.

McHUGH J: No, I know, and there is all sorts of things. I mean, this respondent might have been a poor manager, for example. An expert comes in and says, "Make this change and make that change and this business' takings will increase 20, 30, 40 per cent" as the case may be.

MR KINTOMINAS: Your Honours, I cannot put it any other way other than this, that were saying that a conclusion ought to be drawn that far too much has been paid for the business, one, because of the representation itself and, secondly, because if one was to put in employees and pay them to do the work that the principals were doing there would be no profit at all.

A combination of those factors - - -

McHUGH J: Yes, I understand the way you put it but it does seem to me, Mr Kintominas, that it is a question of fact.

MR KINTOMINAS: If, on the other hand, your Honours are against me on that, then there still was the question of the Court of Appeal exercising a discretion to send the matter back so that there could have been a trial on damages. They did not do that because they said although it was not canvassed it was one where in their view there was clearly no point. Now, in my submission, that cannot be right and having regard to the history of the proceedings, it was one where there should have been a consideration to do that because it was not a matter that had come up in the arbitration, it was not a matter that had been argued on behalf of the other side at trial, it was not a matter that was a ground of appeal, it was a matter that was raised for the first time in written submissions which were served late and one which was swamped by many other matters which the respondents to this appeal argued and lost.

McHUGH J: Yes. Well, your time is up. Thank you, Mr Kintominas.

We need not trouble you, Mr Guest.

Special leave in this matter is refused. We do not think the case raises any matter that calls for the grant of special leave. In addition, we think that the decision of the Court of Appeal was correct.

MR KINTOMINAS: May it please the Court.

MR GUEST: I make an application for costs, your Honour.

McHUGH J: Yes. There is nothing you can say, Mr Kintominas?

MR KINTOMINAS: No, there is nothing I can say.

McHUGH J: Yes. The application is dismissed, with costs.

AT 1.00 PM THE MATTER WAS CONCLUDED